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Pay structure: Low on cash and high on stocks

M Saraswathy  |  Mumbai September 13, 2016 Last Updated at 23:38 IST

Executive compensation structures are increasingly moving towards equity compensation and cash components, with the retention of top management getting tougher than ever. Be it the increased opportunities available in the market at the CXO level or new-age sectors like e-commerce setting very high benchmarks for CEO salaries, head-hunters said it is only getting tougher.

Broadly, executive salaries comprise of a fixed compensation, stock options as well as variable pay, which is dependent on both their performance as well as the company's financials. Anandorup Ghose, partner, Aon Hewitt, said the quantum of equity compensation in the overall pay is increasing gradually.

"At the chief executive level, the value that they place on long-term incentives has increased. Earlier, long-term incentive was seen as an uncertain component, not many knew what it actually meant. But now, you are able to ascribe a real value to your equity awards," he said.

While the compensation structures differ between companies and sectors, on an average, fixed pay is 40-55 per cent of total pay, variable pay differs between 30 and 40 per cent of total pay, and 10-30 per cent constitutes long-term incentives like employee stock ownership plans or Esops.

Sunil Goel, managing director, GlobalHunt, said companies are taking minimum risk as far as the cash component is concerned. With executives exiting earlier than anticipated, he said the Esop component is expected to go up further.

Another area where companies are paying more attention is severance packages. Several firms are also making transparent disclosures about these to the executives at the time of hiring.

Ghose said severance structures are more defined today, especially with more executives being hired from abroad, where these are well-structured.

In earlier times, fringe benefits were a big part of the compensation at CEO/CXO levels. These included loans for buying a property in the city, office car and elite club memberships, among others. These are slowly fading.

Kamal Karanth, managing director, Kelly Services & Kelly OCG India, said fringe benefits are giving way to more cash benefits.

"In the past, the average tenure of the senior executives used to be 7-9 years. Now, that is almost at around 5 years. So, the organisation feels that they are taking too much liability by giving them long-term benefits like soft loans, education loans for kids, club membership that become a hassle to secure and manage at the time of exit," he added.

So, organisations are trying to put more in the pocket of the employee upfront so that it is less painful during separation.

For instance, instead of providing an office car, they would let the executive buy a car of their choice and deduct it from the salary.

New-age companies and start-ups have increased competition for large corporates and there is an inherent fear of losing senior executives to them, according to head-hunters. Karanth said most companies have now begun to benchmark salary every year for senior executives, unlike earlier, when it was done every two to three years.

"Start-ups have disrupted the salary definition. However, companies are able to challenge this by saying that this is the salary benchmark for our sector based on real-time data. This is essential because we are losing people more frequently," he explained.

Some minor changes are also taking place as far as the Esops are concerned. Ghose of Aon Hewitt said some companies and even some boards are now asking for the whole principle of ownership guideline.

"This means that if a person is a CEO, she should not be allowed to sell-off all the shares that are given as part of ESOPs. In foreign countries, CEOs are expected to hold shares worth about 5-6 times of their pay at any point of time. The trend is now catching up in India," he said.

Headhunters and specialist firms are seeing long-term incentives like Esops growing to levels prevalent in the West, where it could be as high as 60 per cent of total pay. While they said India may not reach those levels in the near future, it could move up to 40 per cent.

  • Executive compensation structures are increasingly moving towards equity compensation 
  • Fringe benefits like soft loans, company car are coming down
  • Salary benchmarks becoming more frequent to match market trends
  • More onus on employee, as average tenures at CXO levels go down
  • Severance packages becoming more transparent and well-defined
  • Long-term incentives like Esops slowly moving closer to levels in West